In: Finance
NONCONSTANT GROWTH VALUATION
Holt Enterprises recently paid a dividend, D0, of $3.25. It expects to have nonconstant growth of 19% for 2 years followed by a constant rate of 7% thereafter. The firm's required return is 19%.
(a)- (V)- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
(b)-Firm’s Horizon or Continuing Value
Dividend in Year 1 (D1) = $3.8675 per share [$3.25 x 119%]
Dividend in Year 2 (D2) = $4.6023 per share [$3.8675 x 119%]
Dividend Growth Rate (g) = 7%
Required Rate of Return (Ke) = 19%
Firms Horizon or Continuing Value = D2(1 + g) / (Ke – g)
= $4.6023(1 + 0.07) / (0.19 – 0.07)
= $4.9245 / 0.12
= $41.04
“Firm’s Horizon or Continuing Value = $41.04”
(c)-Firms Intrinsic Value Today
Firms Intrinsic Value Today is the Present Value of the future dividend payments plus the present value of Firm’s Horizon or Continuing Value
Year |
Cash flow ($) |
Present Value factor at 19% |
Stock price ($) |
1 |
3.8675 |
0.84034 |
3.25 |
2 |
4.6023 |
0.70616 |
3.25 |
2 |
41.04 |
0.70616 |
28.98 |
TOTAL |
$35.48 |
||
“Hence, the Firms Intrinsic Value Today = $35.48”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.